On June 17, 2009, President Obama announced bold and sweeping proposals to revamp oversight of the financial markets not seen since post depression times. The proposed changes increase scrutiny of nearly every type of financial company—including mortgage brokers, hedge funds, banks and investment firms. The message to the market is clear: more regulation means more investigations and more prosecutions.

President Obama hopes to modernize regulatory oversight, eliminate jurisdictional overlap, address regulatory weaknesses and restore consumer and investor confidence in our markets. These changes undoubtedly will result in increased government scrutiny and require companies to review their internal compliance practices, prepare for regulatory inquiries and, in some cases, register with the government for the first time.

The administration intends to improve the regulatory framework by addressing five major areas it believes led to the current financial crisis:

  1. Improperly capitalized financial institutions;
  2. Unregulated securitization practices;
  3. Weak consumer and investor protection measures;
  4. Ineffective government intervention in the resolution of important, failed, non-banking financial firms; and
  5. Nonexistent international standards of regulation and supervision.

The administration also plans to raise capital and liquidity requirements for financial institutions and impose more stringent regulation for bank holding companies and other large firms whose failures could impact the stability of our economy. Specifically, the proposals bolster the Federal Reserve's power to regulate these institutions and allow for the creation of a council of regulators tasked with coordinating regulation responsibility among various regulatory agencies. As discussed in our March 26, 2009 Client Alert, the proposal would subject systemically important hedge funds and their managers to capital and liquidity requirements for the first time.

The proposals also address a key component of the mortgage crisis—namely, the nontransparent and unregulated securitization process. Issuers of asset-backed securities will face stricter reporting requirements; the power of credit-rating agencies will be reduced, and a securitization originator, sponsor or broker must now maintain a financial interest in its performance. The regulation gap between futures and securities will be closed and the SEC's and CFTC's oversight and enforcement capabilities for all hedge funds, derivative contracts and derivative dealers will be clearly defined.

The administration also plans to build on its recent credit card company legislation by creating a new regulator tasked with overseeing consumer-related financial products. The newly proposed regulator will shore-up the weak consumer and investor protections across the industry—from mortgages to annuities.

The President acknowledged the inadequacy of the Federal Reserve's approach to dealing with the dissolution of large, failed nonbanking firms like AIG. To better prepare for future failures, the administration plans to establish a resolution mechanism to be used "only in extraordinary circumstances" for those firms whose failure could adversely affect our economy. These new procedures will be akin to the FDIC's procedures for handling bank failures.

These proposals will require more government oversight and a strengthening of the relationships between the existing regulatory agencies. Many institutions, like hedge funds, including private equity and venture capital funds, and mortgage brokers, will face government regulation for the first time. Some government agencies, like the Office of Thrift Supervision will be eliminated completely while others like the SEC and the CFTC will be remain separate, but their roles more clearly defined. In fact, both the SEC and CFTC are bolstering their ranks—the SEC has recently brought in two former federal prosecutors to head the agency's Enforcement Division and its New York Office.

The increased regulation announced by the President will likely lead to an increase in regulatory investigations and criminal prosecutions. Companies need to proactively review existing policies and practices and prepare for this new, and highly regulated, regime.